UNIFIED PAYMENT INTERFACE (UPI)
1. Context
In March and April, the Unified Payments Interface (UPI) system went down three times, causing significant disruptions in payments on apps like GPay and PhonePe, which rely on the system. One of the downtimes was caused by individual banks flooding the National Payments Corporation of India’s (NPCI) systems with transaction status checks
2.Unified Payments Interface (UPI)
- The Unified Payments Interface (UPI) stands as a remarkable testament to India's digital transformation journey. Launched in 2016 by the National Payments Corporation of India (NPCI), UPI was envisioned as a simple, seamless, and secure system to unify multiple bank accounts into a single mobile application, merging various banking features and services under one umbrella.
- Over the years, it has evolved into the backbone of India's booming digital payments ecosystem, making financial transactions more accessible, faster, and inclusive.
- At its core, UPI enables instant money transfers between bank accounts through a mobile platform, without the need for complex bank details. Users can simply link their accounts to UPI apps using a unique Virtual Payment Address (VPA), removing the traditional barriers associated with online banking.
- The platform operates round the clock, 24x7, every day of the year, offering real-time settlement of funds—an essential feature that traditional banking systems struggled to provide.
- One of UPI's most transformative aspects is its role in democratizing digital payments. It has empowered millions of Indians, even in remote corners of the country, to participate in the digital economy.
- From street vendors and small businesses to large corporations, UPI's ease of use and minimal transaction costs have made it the preferred mode of payment across socioeconomic strata. In doing so, it has significantly contributed to India's ambitious vision of a cashless economy, reinforcing the government's push for financial inclusion.
- The evolution of UPI has also been marked by innovation. New features like UPI 2.0 introduced enhancements such as overdraft facilities, one-time mandates for recurring payments, and invoice attachments to strengthen its utility for businesses and consumers alike.
- Moreover, the recent move to allow UPI transactions through feature phones—without the need for internet connectivity—further underlines its commitment to inclusivity.
- Today, UPI handles billions of transactions monthly, outpacing many global payment systems in terms of volume and ease of use. Its growing popularity has also caught international attention, with countries such as Singapore, the UAE, and France signing agreements for cross-border UPI transactions, positioning India as a leader in digital payments innovation on the world stage.
- However, the story of UPI is not without its challenges. Concerns over cybersecurity, digital literacy, and operational risks persist, especially as the system continues to scale.
- Addressing these issues requires constant technological upgradation, regulatory oversight, and public awareness initiatives to ensure that the system remains resilient and trustworthy.
- Nevertheless, UPI symbolizes more than just a payment platform—it represents a silent revolution that has redefined how India thinks about money, commerce, and technology.
- In a rapidly digitalizing world, UPI stands as an inspiring model of how homegrown innovation can drive widespread economic empowerment and create a blueprint for the future of finance
3. How does a UPI Work?
- The Unified Payments Interface (UPI) operates on a framework that evolved from the Immediate Payment Service (IMPS). For a UPI transaction to occur, a bank must become part of the UPI network, enabling customers to access their accounts via a mobile number linked to a Payment Service Provider (PSP) application, such as PhonePe or Google Pay. Today, almost all commercial banks in India, whether public or private, are integrated into the UPI ecosystem.
- One of UPI’s key strengths lies in its interoperability, which allows users to register their bank accounts on any UPI-supported app, and even across multiple apps simultaneously.
- Although it appears to function as a decentralized, peer-to-peer system with direct interaction between banks, in reality, most transactions are processed through the National Payments Corporation of India (NPCI).
- According to Srikanth Lakshmanan from the Cashless Consumer project, the NPCI plays a crucial role by securely encrypting the user’s PIN — known only to the bank — and forwarding the payment request to the payer’s bank to complete the transaction.
- However, this centralization also means that any disruption at the NPCI’s end could halt transactions entirely, making it a potential single point of failure
4. National Payments Corporation of India (NPCI)
- The National Payments Corporation of India (NPCI) is the invisible yet indispensable backbone of India's digital payments landscape. Established in 2008 under the joint initiative of the Reserve Bank of India (RBI) and the Indian Banks’ Association (IBA), NPCI was created with the vision of consolidating and integrating various payment systems across the country, with a focus on making digital transactions seamless, secure, and accessible to all sections of society.
- In many ways, NPCI has been the quiet architect behind India's rapid transition to a cashless economy. It manages and operates some of the country’s most critical payment infrastructures, including services like the Immediate Payment Service (IMPS), RuPay card network, Bharat Bill Payment System (BBPS), and, most notably, the Unified Payments Interface (UPI).
- Each of these innovations has fundamentally reshaped how Indians interact with money, whether it’s withdrawing cash, paying bills, or transferring funds with the tap of a smartphone.
- Perhaps NPCI's most celebrated contribution is the development of UPI, a groundbreaking platform that enabled instant, interoperable transactions between banks, redefining digital commerce in India.
- By fostering collaboration between banks, fintech companies, and consumers, NPCI created a payments ecosystem that is not only inclusive but also globally admired for its scale, efficiency, and innovation.
- NPCI’s role goes beyond technological innovation; it embodies the idea of public digital infrastructure. As a not-for-profit organization owned by a consortium of major Indian banks, it operates with the mandate to serve public interest rather than to maximize profits.
- This governance model has allowed it to prioritize reliability, affordability, and widespread access over commercial gain—a crucial factor behind the democratization of digital payments in India.
- However, NPCI’s journey is not without its challenges. As digital transactions surge into billions each month, concerns around scalability, security, and operational resilience have come to the forefront.
- With UPI becoming nearly ubiquitous in urban and increasingly rural India, NPCI must constantly upgrade its systems and safeguard against systemic risks, especially since it represents a single point of failure in India's digital payment architecture.
- Nonetheless, the National Payments Corporation of India remains a stellar example of what focused public-private collaboration can achieve. It stands today not just as a financial utility, but as a symbol of India’s digital aspirations—a testament to how technology, when driven by the public good, can empower millions and redefine a nation's economic future
5. Way Forward
According to the Reserve Bank of India (RBI), banks typically bear a cost of around ₹0.80 for each transaction, primarily due to expenses related to SMS notifications — fees collected by telecom providers for sending commercial messages — along with the ongoing costs of maintaining and updating transaction records. Despite these expenses, banks are prohibited from levying a Merchant Discount Rate (MDR) to recover their costs, leaving them with limited motivation to ensure high uptime and service reliability. As a result, individual banks experience service disruptions more frequently than the National Payments Corporation of India (NPCI) itself, often leading to a rise in transaction failures
|
For Prelims: Unified Payments Interface, National Payments Corporation of India, Application Supported by Blocked Amount, IPO, Google Pay, Punjab National Bank, Capital Markets, Mutual Funds, Loan repayment, P2P, P2M,
For Mains:
1. What is Unified Payments Interface (UPI)? Discuss the need for limits on UPI transactions. (250 Words)
|
|
Previous Year Questions
1. Which of the following is a most likely consequence of implementing the 'Unified Payments Interface (UPI)'? (UPSC 2017)
A. Mobile wallets will not be necessary for online payments.
B. Digital currency will totally replace the physical currency in about two decades.
C. FDI inflows will drastically increase.
D. Direct transfer of subsidies to poor people will become very effective.
Answer: A
2. With reference to digital payments, consider the following statements: (UPSC 2018)
1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
2. While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication.
Which of the statements given above is/are correct?
A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2
Answer: A
|
Source: The Hindu
